Power, politics and opportunism4 July 2023
After three decades of progressive gas and power market privatisation in Europe, North America, and parts of Asia as governments passed management responsibility of energy to the private sector with the aim of increasing efficiency and lowering energy prices through market competition, the energy crisis, and the challenge to decarbonise, are now raising questions over the efficacy of the markets in delivering affordability, supply security and sustainability. The notion that ‘the market knows best’ only holds true when it aligns with the prevailing political dogma.
While the energy crisis is not of the market’s making and is arguably more a consequence of historical energy policy naivety, and particularly in respect of the German government’s decision to place its energy dependency on Russia, the market’s perceived failure to provide affordable and sustainable energy fuels political opportunism. Nowhere is this more evident than in Britain.
The cost of living crisis and energy crisis are, according to the opposition Labour party, synonymous. Against a backdrop of surging inflation that was driven by rising energy costs and has seen public sector services stage months of industrial action as inflation significantly outpaces wage growth, Labour is proclaiming its energy epiphany and its message is simple; put more trust in a Labour government because the markets are profiteering from the crisis and not delivering on affordability and sustainability. But can a government deliver where the market has seemingly failed?
A market can only deliver within the parameters set by government and regulators, and the current energy market, which was mostly structured in the 1990s when fossil fuels powered the country and sustainability was not a policy objective, is unfortunately no longer fit for purpose. The profiteering of renewable, and mostly wind, generators has been driven by a system that prices electricity at the marginal cost, which is natural gas. Yet wind typically provides over a third of Britain’s electricity and supply and if there were no curtailment issues this share would be higher. Placing a windfall tax on windfarms that have profited from surging gas prices, as Labour would do if it were currently in government, would help lower energy bills today but at what cost to future bills if a windfall tax discouraged investment in wind and other renewable capacity?
Although a general election is not expected before summer 2024 the Labour party has laid out its plan for what it calls a ‘fairer, greener future’.
It reads like a child’s Santa wish list. While the detail behind the pledges would not be expected to be fleshed out yet, they raise more questions rather than providing the intended political insurance.
Central to the Labour plan are windfall taxes on the ‘huge profits of oil and gas companies’ to freeze energy bills, and the establishment of GB Energy, a publicly owned company, ‘so the UK can’t be held to ransom over energy supply by dictators like Putin’.
The problem with taxation is that if set too high it acts as disincentive to invest, while most of the profits made by the large oil and gas companies are from non-UK operations. BP, for example, only made around 20% of its latest quarterly profits from its UK operations. Given that these international companies are more profitable outside the UK is it economically and energy literate to further raise taxes and risk pushing those companies out of the UK? Labour has also pledged to revoke all new oil and gas exploration in the British North Sea as part of its greening agenda, but with Britain only meeting just over a third of its gas demand from its own resources the end of exploration just makes Britain more dependent on gas imports and less supply secure.
Establishing a public energy company does not remove ‘dictator ransom risks’, but increasing supply independence does. A publicly owned energy company will just reduce competition and, if history is repeated, increase inefficiencies. And given Britain’s publicly owned companies’ current appetite for strikes, and Labour’s pledge to repeal the governments stricter restrictions on strikes, it could be the unions effectively running GB Energy. Without investment in more indigenous natural gas, hydrogen and biomethane production Britain will be become more gas import dependent, including dependence on LNG where Chinese energy policy is a major influence on pricing.
Labour also wants to decarbonise electricity supply by 2030 ‘by harnessing the power of marine and tidal energy, quadrupling offshore wind, doubling onshore wind, tripling solar power and ensuring the long-term security of nuclear power.’ This would bring the government’s target forward by five years, but at what cost?
A rapid escalation in renewable power would require subsidies and incentives to support the investment required and there would need to be significant investment in transmission capacity to accommodate the new renewable capacity. These costs would have to be recovered, most likely through raising the non-energy component of gas and power tariffs.
These policy pledges are akin to covering an imperfect cake with fancy icing, but unless the energy cake is changed the icing will not hold. Britain’s energy market is not working efficiently because electricity pricing ignores the renewable contribution by focusing on marginal costs; and the installed wind capacity, particularly in Scotland, is regularly curtailed by the lack of sufficient transmission capacity. And, according to regulator Ofgem, around 20% of low carbon generation capacity that is currently in the transmission connection queue will have to wait a further 10 years before reaching connection dates, while another 40% (120 GW) of capacity has been offered connection dates of 2030 or beyond. Quadrupling delivered offshore wind supply by 2030 is aspirational, not achievable.
Rather than address the underlying market faults and presenting credible possible solutions, Labour is pledging what it believes are vote winning policies centred on taking back control from a profiteering market and making energy more affordable and sustainable. A vote winner in 2024? Yes. But a more affordable, secure, and sustainable energy market in 2030?
Energy, rightly, will play a major role in the next election. Britain was an energy beacon in the 1990s with its development of gas and electricity contestability. Three decades later, as the world adjusts to a new energy-normal in the aftermath of the global energy crisis, Britain again has an opportunity to be a beacon for the new renewable-centric zero-carbon energy market. What Britain does not need are policies derived from political opportunism that promise short-term gains yet are likely to deliver longer-term pain.
Author: Jeremy Wilcox, managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm